The Truth About Post Pandemic Construction Costs

After a turbulent 2020, 2021 is promising to be a year of rebuilding and growth in the commercial real estate industry. Confidence is rising in the market and companies are eager to return to normalcy, challenging the construction industry to meet demands after a year of idled progress.  The good news is that there are reasons to be optimistic for the future of construction, but not without lingering questions. How fast are costs escalating? What sectors are hot?  

Here’s what you can expect in the marketplace in Q2 in a quick and easy read. 

What’s going on with costs? 

This is quite literally the million-dollar question.  Materials and labor notoriously drive rising costs in construction. Here are current factors to look out for that could affect your project.

 

Steel shortages 

The steel shortage is causing 4-6 week delays and elevated costs. These are the reasons why steel prices are not likely to decrease again:  

    • Domestic steel mills are slow to ramp up production to keep up with the dramatic turnaround in business after record-breaking pandemic lows—even as factories run 7 days a week and with increased headcounts. 
    • Scrap and iron ore prices are on the rise, impacting steel producers’ bottom line.  
    • Tariffs enacted during the Trump Administration on foreign steel are still enforced which means steel prices are not expected to decrease any time soon. The domestic steel industry is urging the Biden Administration to keep the tariffs in place, fearing losses to less expensive foreign steel.

Lumber shortages

This has bigger impacts on residential, but commercial construction should also be prepared for potential increases in cost and delays. A perfect storm of events contributed to this shortage:

    • A backlog was created when mills shut down following the halt in construction in some states. 
    • COVID safety protocols stalled the productivity of lumber mill’s production capabilities. 
    • The stay at home mandate ignited a residential remodeling boom that used up much of the existing lumber supply, which was already low due to production issues. 
    • The massive wildfires of 2020 wiped out millions of acres of timberland. 

Subcontractor pricing changes  

Throughout the pandemic, the market experienced lower pricing without actual cuts in labor wages. Instead, subcontractors were discounting their margins on jobs in order to secure work and keep a healthy backlog amid an uncertain future.

A typical subcontractor markup is 10-20% on top of material and labor costs. During COVID, markups dropped to nearly zero. Now that the market is recovering and projects are becoming less scarce, subcontractors will have less need to undercut their margins to win jobs. Currently, the markups range from 2-8% and will slowly continue to increase throughout the year. 

How to mitigate risk 

Our recommendation is to lock in your pricing now while the market is slowly recovering because labor and material prices will no longer decrease. Work with your general contractor to purchase and store materials early. Once you have your partners (architect, engineer and general contractor) involved, you can lean on them to determine material delays and procure alternative solutions to meet your needs. We anticipate that by 2022, construction pricing will rise back up to the same levels we experienced pre-pandemic. 

 

Activity in the market amid a pandemic 

The pandemic caused a great deal of uncertainty about the commercial real estate industry, but many took this opportunity to go bargain-hunting for space. 

    • An uptick in biotech firms have entered the local market, most recently Talis Biomedical, a Silicon Valley startup that leased space at Fulton Labs, a 725,000 sq. ft. campus dedicated to lab facilities. 
    • A number of major downtown projects continued despite the pandemic including Salesforce Tower (1.2 million sq. ft.) and Sterling Bay’s 47-story mixed-use tower.  

While there is promising activity in the market, the reality is that sublease vacancies are high and a slow recovery process is expected. However, the rollout of COVID vaccines provides hope for building confidence in public health to get employees safely back into offices. Chicago also has a historically resilient economy. Our diversity of industries and infrastructure in combination with a highly-educated workforce will help us prevail.  

 

Rebuilding and recovery have begun 

After a year of uncertainty for the future of traditional office space, we are starting to see progress. Projects that were once on hold have resumed with little deviation from their original plans. Labor rates are on an uptick and material shortages are coming from rising demand, instead of the virus-induced supplier issues of 2020. But progress also means that clients are becoming more informed. Businesses are demanding more transparency from their construction partners in regard to price and schedule and our promise as an industry must be to meet that expectation

Downloadable Cost Guide

Our Cost Trends Guide includes tools to help. This guide includes cost trends for the past decade, our 2021 market predictions and a list of project factors that general contractors can and cannot control. This will give insight into the areas where creative solutions can be implemented to save time and money on construction projects. If you would like more customized help, we are happy to assist.   

Complete the form below to download our cost trends guide.




    AUTHORS 

    DAN POLITO

    Dan is a Chicago native with over a decade of construction experience in both the Midwest and West Coast markets.  As Preconstruction Manager for ACCEND, Dan is responsible for guiding clients through the precon process to seamlessly plan, budget and execute commercial construction projects. He has built over 1.5 million square feet of space for the region’s leading companies including University of Chicago, Motorola Mobility, Capital One and Constellation Brands.  

    Contact Dan

    MATT SLAYEN

    Matt Slayen is our sister company’s, Skyline Construction, Director of Preconstruction and Estimating and has over 25 years of experience in construction. He has worn many hats in this industry from estimating to project management, and thoroughly understands the business. He regularly presents cost and market updates to brokerage and architectural firms throughout the Bay Area and is available to offer his knowledge virtually.  

    Contact MAtt